AIG worries investors as it racks up huge losses

US insurance giant AIG made a $2.8bn (£2.1bn) loss before tax in the third quarter of 2017 following a £3bn natural catastrophe claims bill and $836m of reserve strengthening.

The loss compares with a $737m profit in last year’s third quarter.

The heavy third quarter loss slashed AIG’s nine-month 2017 profit before tax to just $591m from the $3.4bn profit it made in the first nine months of 2016.

Analyst Amit Kumar at Buckingham Research Group said investors would be avoiding AIG.

“Continuous adverse development in commercial lines, in conjunction with the lack of a tangible improvement plan, will continue to lead investors to avoid this name,” he said.

Hurricane hit and reserves 

AIG’s $3bn catastrophe claims bill mainly came from hurricanes Harvey, Irma and Maria.

However, what was really worrying analysts was the reserve strengthening. 

The $836m reserve hike was to tackle higher than expected claims in AIG’s commercial business. $705m of the total was for the 2016 accident year, which is not covered by the $9.8bn adverse development reinsurance cover that AIG bought from Berkshire Hathaway-owned reinsurer National Indemnity in January this year.

While the National Indemnity deal protects AIG against higher-than-expected claims in long-tail commercial business, it only covers years up to and including 2015.

As a result, AIG’s commercial combined operating ratio (COR) was pushed to 195.4% for the third quarter of 2017 from 105.8% in last year’s third quarter.

The personal lines business reported a COR of 105.6% (Q3 2016: $97.5%).

AIG boss upbeat

AIG chief executive Brian Duperreault insisted that the company was taking steps to improve commercial underwriting.

He said: “We are laser focused on commercial underwriting and taking actions to enhance underwriting tools and, more importantly, our talent base – so much so that I have declared 2018 the ‘Year of the Underwriter.’”

He added: “With this increased focus on underwriting, and our recently announced changes to AIG’s operating structure and executive leadership, we will continue to execute on our strategy to better position AIG for long term profitable growth.”